What is the intrinsic value of Fairfax's stock as of today?

[Viking]

What is your estimate of the 'intrinsic value' of Fairfax's stock as of today? What says the COBF mob? The stock closed on Friday at US$734 = C$987.

 

If your intrinsic value is a range, please vote where mid-point falls.

 

After you vote, can you provide a brief comment (if you are comfortable): what is your number (or range) for intrinsic value? How did you come up with your estimate? Or simply comment on whatever you would like. I want to keep things pretty vague so we get as much original thinking as possible.

 

Fairfax's stock has had a pretty incredible run the past 30 months. Has it passed your estimate of intrinsic value? Please let other board members know your thoughts. 

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It would be interesting to know what management at Fairfax thinks the intrinsic value of their stock is as of today. 

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What is 'intrinsic value' and how is it calculated? Go with whatever you think it is. Below is Buffett's definition. 

 

Buffett ( Berkshire Hathway’s manual ), “The intrinsic value can be defined simply. It is the discounted value of the cash that can be taken out of a business during its remaining life. As our definition suggests, intrinsic value is an estimate rather than a price figure. And it is definitely an estimate that must be changed as interest rates move or forecast or future cash flows are revised. Two people looking at the same set of facts almost inevitably come up with slightly different intrinsic value figures.”

 

Edited June 3, 2023 by Viking

[kodiak]

Intrinsic Value Estimate

 

Book value is around $800 today. It will be close to $1,300 in three years as we earn $150 per share over the next three years. 

We earn $50 per share from bond portfolio, $50 from underwriting and $50 from equity gains. 

 

In 36 months, book is $1,300 and shares have to be at least 120% of book at that time. Hence $1,560 per share USD in 36 months. 

 

In my model, current price of $730 is nuts. We could easily be trading at 120% of book today and that number would be $960 USD right now. That would be a reasonable value today. If you paid $960 today and the stock was worth $1,560 in 36 months, the annual return would be north of 15% annually. That seems about right to me. If they execute on this 3-year plan, the price to book should move closer to 150% of book. So in 5 years if the company continues to execute,  you might get closer to book value of $1,600 and then at 150% of book, the stock has a shot at trading for around $2,400. This may seem crazy, but if they execute, these are reasonable targets. 

[Malmqky]

1 hour ago, kodiak said:

Intrinsic Value Estimate

 

Book value is around $800 today. It will be close to $1,300 in three years as we earn $150 per share over the next three years. 

We earn $50 per share from bond portfolio, $50 from underwriting and $50 from equity gains. 

 

In 36 months, book is $1,300 and shares have to be at least 120% of book at that time. Hence $1,560 per share USD in 36 months. 

 

In my model, current price of $730 is nuts. We could easily be trading at 120% of book today and that number would be $960 USD right now. That would be a reasonable value today. If you paid $960 today and the stock was worth $1,560 in 36 months, the annual return would be north of 15% annually. That seems about right to me. If they execute on this 3-year plan, the price to book should move closer to 150% of book. So in 5 years if the company continues to execute,  you might get closer to book value of $1,600 and then at 150% of book, the stock has a shot at trading for around $2,400. This may seem crazy, but if they execute, these are reasonable targets. 

I just slapped on a 1.2x multiple to book and called it a day for my vote as well. 1x pb is obviously undervalued, and 1.5x pb is probably trending towards overvalued. So I just use that as a range for IV. 
 

Fairfax is very complex (thanks @Viking for the analysis on it) and I think keeping things simple here is the way to go. No need to make things even more complex and speculating by trying to do a DCF, etc.

Edited June 3, 2023 by Malmqky

[SafetyinNumbers]

The way I measure the high end of intrinsic value for Fairfax is to look at the price that gives an expected long term return of 10%. Maybe it’s too simplistic and we are in a high inflation world and I should adjust to 12% i.e. moving my long term inflation estimate to 5%. Ultimately that just means a higher interest rate environment which means the float is more valuable so there is a natural hedge. So I call it a wash and stick to 10%.

 

On that basis, if Fairfax has a long term expected ROE of 15%, then 1.5x book value seems reasonable as it’s a 10% return on price. Any discount to that is margin of safety including the potential for cat losses that results in a zero. There should be some discount even if the odds are low they are non-zero despite that at some point in the next 5 years, I think we’ll trade north of the above intrinsic value estimate (i.e. have positive Social Value). The next few years, we could reasonably earn north of a 15% ROE so 3 years hence, BV could be US$1250 including some embedded gains in Ambridge, GIG, Digit and Fairfax India (Anchorage IPO). That would put the IV estimate (1.5x BV) in 2026 at US$1875 discounted at 10% to present day is ~US$1425 including dividends.

 

Another way to triangulate intrinsic value is to listen to Warren Buffett when asked in 1996 about BRK’s $7b insurance float that he wouldn’t sell that “liability” for $7b in cash unencumbered if it meant they couldn’t compete in insurance again.

 

 

 

 On that basis, a low end estimate of intrinsic value is book value (BV) - insurance goodwill (IG) + insurance float (IF). For Fairfax that is approximately: 

 

+ US$18.7b BV

- US$3.4b IG

+ US$31.2b IF

= US46.5b IV

Or ~US$2000/share

 

These are IV estimates and I try to buy things well under these targets so I get a high margin of safety which I need as I’m wrong about a third of the time. Buffett’s method results in a lower expected return than 10% which is why the IV is so much higher but arguably it’s not unreasonable if the quality of Fairfax’s insurance businesses are as good as they appear.
 

The high class hardship for me will be trying to hold on to the majority of my position until it moves above my estimate of intrinsic value and I don’t think it’s out of the question we get there reasonably soon for two related reasons. 

 

First, we have a reasonably strong shareholder base as the share turnover is low which is what happens when a company is trading well below intrinsic value. 

 

Even though the share turnover is low, it’s hard to understand for investors that look at the company the way Viking does, for example, why anyone is selling at these prices. I talk to a lot of investors and my conclusion is that most who are selling are doing so because they made a great decision a while ago and have too high a concentration and the rest are worried about what Prem’s next mistake is going to be and don’t want to be around when it happens. 

 

Congrats to those on this board in the former category. For those in the latter category the stock could appreciate a lot before the next mistake and there will be one. When they do make a mistake we might not know it for years afterwards and actually cheer it on when it happens like the hedges when they were initially put on. Ultimately, it’s not obvious to see what looms as a problem now which is why most of us here are so bullish I suppose. They might have already made the mistake that will cause the next drawdown. 

 

Essentially both groups are making their decisions around price and not intrinsic value. They want to avoid the next drawdown. We’ve all done it and we’ll probably all do it again. Maybe even on Fairfax.

 

If we buy the premise that our shareholder base knows what it owns for the most part (this thread was a great idea Viking as always!) should mean institutional buying will move the shares up significantly. The source of the buying is the second reason we can get above intrinsic value. It could be the company via share buybacks but ideally its active Canadian managers trying to keep up with the S&P/TSX.

 

I have a friend and former colleague who is a PM at a Canadian asset manager. He likens it to Constellation Software about 5 years ago when its weighting was around 80bps. Fairfax is around that weighting now and has outperformed the index by 100% in the past three years.

 

CSU outperformed the S&P/TSX by ~85% cumulatively from June 2015-2018. The pre is that pain caused PMs to reconsider how they were valuing CSU and the 5 years since it has outperformed the S&P/TSX by a further ~125%. 

 

That’s not to say the performance or outperformance for FFH will be similar or if it will happen at all. CSU had to execute and so will FFH but at this starting valuation and set up the odds seem excellent. PMs had to get over the multiple they were paying for CSU to get to market weight or even better overweight. With Fairfax, the valuation is easy to get over but the hurdle is defending Prem. I have had a financials analyst at a small Canadian broker tell me he can’t send his brokers out to defend Prem. I don’t think he’s thinking about it in terms of market weight yet but his strategist might soon.
 

A signal that it might be playing out is if the volume picks up. It’s been stubbornly low for a while so while some funds might be accumulating, there isn’t a lot of urgency or competition. Perhaps, I’m just being impatient however given FFH has already outperformed XIC by ~18% YTD.

Edited June 4, 2023 by SafetyinNumbers

[MMM20]

I guess I’m still way off in the right tail b/c I think something like ~US$2,000 right now would pencil out to a fair ~10-12% per share expected return.

 

My base case = flattish float growth + 98-99% normalized combined ratio + mid/high single digits return on the investment portfolio + good enough capital allocation => sustainable 15%+ per share EPS growth from a ~15-20% EPS yield starting point.
 

That’s a setup for lollapalooza returns like a leveraged buyout in the early 2000s when the Yale endowment was loading up on LBOs of private companies at low/mid single digit EBITDA multiples that went on to expand and make them a fortune (and then of course the copycats piled in at 3x+ higher entry valuations)… except that Fairfax has better quality and much cheaper (probably free or negative cost) leverage. I still don’t think many people fully appreciate this point. 

 

I do understand why people prefer BVPS, but I think in this case and at this time it’s misleading and anchoring investors to much lower than fair numbers in terms of first principles IVPS following Buffett.

 

Even in an inevitable soft market, the float is not going to get cut in half. That’s one way to look at what’s priced in at US$730. 

 

The market remains extremely unfairly negatively biased and slow to incorporate new information. I think the stock is still priced for capital destruction and a zero interest rate world.

 

So FFH is priced to a ~30-40% CAGR over the next ~3-5 years, assuming a gradual rerating to a fair and historically normal low-to-mid teens multiple of normalized earnings.

 

If I’m right, I’ll end up with a ~10x over 5-10 years from Jan ‘21 b/c the earnings base has ~3-5x’d over the last ~5 years, things have fundamentally transformed, and yet the stock price still reflects skepticism / disdain. That should slowly melt away with good execution…

 

…and probably a shift, already in motion for the past few years, to a new generation of shareholders who don’t unduly overweight the early/mid 2010s results.

 

It doesn’t bother me that FFH doesn’t have a BRK-like fortress balance sheet. I think that’ll come at some point down the road, and my risk tolerance is high. 
 

I am happy for the stock to trade at a heavy discount to IV for years as they flip to highly cash generative and take out stock. 
 

Disclosure: talking my book! My biggest position since Jan ‘21 and I recently added ~20% in the low $690s. Probably wrong. Not investment advice. 

 

 

Edited June 4, 2023 by MMM20

[kodiak]

My estimates of intrinsic value and where this will trade in 36 or even 60 months do not assume any major buybacks from the company. It is possible that Fairfax takes the share count from the current 23 million shares to 18 or even 15 million depending on how much cash the insurance business generates once premium growth starts to slow down. In a world of zero premium growth and respectable combined ratios, Fairfax will not be required to keep injecting capital into these businesses, as they have over the last few years to fund the growth in premiums. Once premiums stop growing, these same insurance subsidiaries will begin to send capital back to the parent. The uses of this capital will include the buying back of all the remaining insurance stubs from OMERS. I would also expect them to take a couple more public companies private and finally, buyback shares below 120% of book value. If they earn $150 per year for three years, that generates over $11 billion in capital. That capital is going to go somewhere. After the minority cleanups, we might see some meaningful repurchases. Those are not in my projections. If they happen, the chances of a $2,000 or $2,500 Fairfax share price in less than 5 years grows considerably. At the current price of $730, this stock is simply too cheap and I would argue a better deal at $730 than $500 one year ago. People selling at $730 today simply aren't doing the work to calculate the earnings power of Fairfax or must be finding other stocks to own. I would love to know what they are buying to justify selling Fairfax. They have to be fantastically cheap stocks with a wonderful margin of safety. 

 

I am selling other things in my portfolio to currently buy shares of NextNAV, a $300 million market cap failed SPAC that owns a portfolio of 2.4 billion POPs of nationwide spectrum in the 900 MHz band. This spectrum is worth between $1.5 and $2.5 billion and should be monetized over the next 24 months. The stock is $2.67 and I expect the shares to be worth easily north of $10 each in 24 months. They also have a cutting edge alternative to GPS which you get for free and could be worth $10 or $15 in 3-5 years. Finally, the corporate governance is fantastic, with heavy inside ownership, very smart spectrum folks on the Board and a history of making money for investors. Even with all that potential upside, I am not going to sell Fairfax to fund the purchase of NN shares. 

NextNav investor presentation.pdf

[maxthetrade]

Intrinsic Value is a somewhat gibberish concept. If you'd know future cash flows with 100% certainty it would make sense for a business to trade at the sum of discounted future cash flow but no one really knows. Buffett repeatedly said he wants to trade Berkshire at a price so that owners get the same result as the business (paraphrased). With that yardstick in mind I think it makes sense for FFH to trade around BV until they have shown over several cycles that they can underwrite sub 100 on average. Depending n your assumptions 1.0-1.2BV is pobably a very reasonable range for fair value. 

 

BTW, I'm not convinced that FFH really can deliver 15% ROE over a full cycle but we'll see... if they can 1.8BV would certainly be a reasonable valuation. 

Edited June 4, 2023 by maxthetrade

[Viking]

6 hours ago, kodiak said:

My estimates of intrinsic value and where this will trade in 36 or even 60 months do not assume any major buybacks from the company. It is possible that Fairfax takes the share count from the current 23 million shares to 18 or even 15 million depending on how much cash the insurance business generates once premium growth starts to slow down. In a world of zero premium growth and respectable combined ratios, Fairfax will not be required to keep injecting capital into these businesses, as they have over the last few years to fund the growth in premiums. Once premiums stop growing, these same insurance subsidiaries will begin to send capital back to the parent. The uses of this capital will include the buying back of all the remaining insurance stubs from OMERS. I would also expect them to take a couple more public companies private and finally, buyback shares below 120% of book value. If they earn $150 per year for three years, that generates over $11 billion in capital. That capital is going to go somewhere. After the minority cleanups, we might see some meaningful repurchases. Those are not in my projections. If they happen, the chances of a $2,000 or $2,500 Fairfax share price in less than 5 years grows considerably. At the current price of $730, this stock is simply too cheap and I would argue a better deal at $730 than $500 one year ago. People selling at $730 today simply aren't doing the work to calculate the earnings power of Fairfax or must be finding other stocks to own. I would love to know what they are buying to justify selling Fairfax. They have to be fantastically cheap stocks with a wonderful margin of safety. 

 

I am selling other things in my portfolio to currently buy shares of NextNAV, a $300 million market cap failed SPAC that owns a portfolio of 2.4 billion POPs of nationwide spectrum in the 900 MHz band. This spectrum is worth between $1.5 and $2.5 billion and should be monetized over the next 24 months. The stock is $2.67 and I expect the shares to be worth easily north of $10 each in 24 months. They also have a cutting edge alternative to GPS which you get for free and could be worth $10 or $15 in 3-5 years. Finally, the corporate governance is fantastic, with heavy inside ownership, very smart spectrum folks on the Board and a history of making money for investors. Even with all that potential upside, I am not going to sell Fairfax to fund the purchase of NN shares. 

NextNav investor presentation.pdf 2.44 MB · 13 downloads

@kodiak i also see share buybacks as a potential catalysts for Fairfax. With all the cash they are currently generating it will be interesting to see how much they allocate to share buybacks: do they go big (5% or more in one year) or do they go small (2 to 3% in one year). Fairfax will likely be opportunistic… allocate capital to the best available opportunity.

[Viking]

Thanks to everyone who took the time to participate in the poll. The poll is still open if you have not voted yet and wish to do so. It is great to get an idea what a large group of board members are thinking at a specific point in time. I must say, i was surprised by the results. The COBF mob, 46 strong, assigned a fair value to Fairfax of about $1,070/share. Actually, this is low as 14 respondents chose the highest value option ($1,200 or more). The ranges on the poll were way off (needed fewer on the low end and more on the high end).

 

My key take-away? Most board members who follow Fairfax feel, despite the run-up the past 30 months, that the stock is still very undervalued.  

 

What did I vote? $900-$999 = midpoint of US$950. Today.

 

To come up with my number I used two rules of thumb:

• PE = $120/share (normalized earnings today) 8 x multiple = $960
• P/BV = BV of $800 x 1.1 = $880 (I went with 1.1 here - instead of something higher - because of the significant one time bump from IFRS-17)

Yes, both my earnings and book value multiples are very low. But that is how I see Mr. Market valuing Fairfax today (sentiment/confidence in management, while improving, is still low). As was mentioned by others, Fairfax is a complex animal. And there is the risk of another 'equity hedge' type of decision. 

 

There has been an enormous number of changes happening under the hood at Fairfax over the past couple of years. This makes it more difficult to forecast future earnings and book value growth - so most investors (not the ones on this board) continue to undervalue Fairfax. As Fairfax executes well and delivers solid results - and new (higher) run rates get reported (and baked into historical numbers) over the next couple of years this will get easier. As the larger investment community gets more comfortable that the higher numbers are durable we should see multiple expansion (hopefully closer to other insurance peers). It would not surprise me to see Fairfax's stock deliver another couple of years of 20% to 30% annual returns - driven by mid teens growth in book value and multiple expansion.

Edited June 5, 2023 by Viking

[SafetyinNumbers]

1 hour ago, Viking said:

Thanks to everyone who took the time to participate in the poll. The poll is still open if you have not voted yet and wish to do so. It is great to get an idea what a large group of board members are thinking at a specific point in time. I must say, i was surprised by the results. The COBF mob, 46 strong, assigned a fair value to Fairfax of about $1,070/share. Actually, this is low as 14 respondents chose the highest value option ($1,200 or more). The ranges on the poll were way off (needed fewer on the low end and more on the high end).

 

My key take-away? Most board members who follow Fairfax feel, despite the run-up the past 30 months, that the stock is still very undervalued.  

 

What did I vote? $900-$999 = midpoint of US$950. Today.

 

To come up with my number I used two rules of thumb:

• PE = $120/share (normalized earnings today) 8 x multiple = $960
• P/BV = BV of $800 x 1.1 = $880 (I went with 1.1 here - instead of something higher - because of the significant one time bump from IFRS-17)

Yes, both my earnings and book value multiples are very low. But that is how I see Mr. Market valuing Fairfax today (sentiment/confidence in management, while improving, is still low). As was mentioned by others, Fairfax is a complex animal. And there is the risk of another 'equity hedge' type of decision. 

 

There has been an enormous number of changes happening under the hood at Fairfax over the past couple of years. This makes it more difficult to forecast future earnings and book value growth - so most investors (not the ones on this board) continue to undervalue Fairfax. As Fairfax executes well and delivers solid results - and new (higher) run rates get reported (and baked into historical numbers) over the next couple of years this will get easier. As the larger investment community gets more comfortable that the higher numbers are durable we should see multiple expansion (hopefully closer to other insurance peers). It would not surprise me to see Fairfax's stock deliver another couple of years of 20% to 30% annual returns - driven by mid teens growth in book value and multiple expansion.

If my theory is right on the chase by Canadian PMs who are underweight FFH then we could see its outperformance accelerate. Those managers will buy until valuation is “fair” and that range is big as we can see from this board. In fact, FFH has already outperformed the index in each of the past three years and the relative outperformance has increased each subsequent year but it might just be a coincidence. Obviously execution has to continue but I think the biggest risk is underestimating intrinsic value and selling into multiple expansion due to the index chase.

 

My tweet has the relative performance charts vs the XIC which is the S&P/TSX Composite ETF for June 2020 - June 2023 and each year in there.

 

 

[LC]

Execution i think is the biggest concern. Two fronts: when will the insurance market soften; how will the equity investments (and future decisions) hold up. Particularly, if US interest rates hover in the 5-7% range.

[SafetyinNumbers]

12 hours ago, LC said:

Execution i think is the biggest concern. Two fronts: when will the insurance market soften; how will the equity investments (and future decisions) hold up. Particularly, if US interest rates hover in the 5-7% range.

That would be amazing for the stock. If the insurance market softens then billions comes back to the holdco every year which would be used for buybacks or new equity investments if there are better opportunities there. Float would print even more money at 5-7% plus the opportunity to do more deals like KW this morning where the float is earning 10%.

 

My contention is that currently you are either getting the insurance business (including float) or the equity portfolio for free which makes execution risk less important at current prices.

[Luca]

10 minutes ago, SafetyinNumbers said:

That would be amazing for the stock. If the insurance market softens then billions comes back to the holdco every year which would be used for buybacks or new equity investments if there are better opportunities there. Float would print even more money at 5-7% plus the opportunity to do more deals like KW this morning where the float is earning 10%.

 

My contention is that currently you are either getting the insurance business (including float) or the equity portfolio for free which makes execution risk less important at current prices.

Float at 5-7% constant for 10 years would be incredible, more than the whole current market cap. And yeah, you are getting a lot for free then!

Edited June 5, 2023 by Luca

[Haryana]

Fairfax is a company that is run with daily effort for perpetual survival.

As an insurance company they work on that survivability on a daily basis.

They sacrificed short term gain for long-term survival by market shorts.

 

They have been running strong and getting better for the last 38 years.

Chairman who controls voting has told that company will never be sold.

Now, I am very afraid and want a great margin of safety.

So, I assume that they survive only for another 38 years.

Also, they stop growing from here and make only $120/year.

Using 3% as historic long-term market interest rate or cost of borrowing:

 

Present Value = (discount @3% $120/year for 38 years)

 

= $2700.

 

[Saluki]

On 6/4/2023 at 1:42 PM, kodiak said:

 

 

I am selling other things in my portfolio to currently buy shares of NextNAV, a $300 million market cap failed SPAC that owns a portfolio of 2.4 billion POPs of nationwide spectrum in the 900 MHz band. This spectrum is worth between $1.5 and $2.5 billion and should be monetized over the next 24 months. The stock is $2.67 and I expect the shares to be worth easily north of $10 each in 24 months. They also have a cutting edge alternative to GPS which you get for free and could be worth $10 or $15 in 3-5 years. Finally, the corporate governance is fantastic, with heavy inside ownership, very smart spectrum folks on the Board and a history of making money for investors. Even with all that potential upside, I am not going to sell Fairfax to fund the purchase of NN shares. 

NextNav investor presentation.pdf 2.44 MB · 29 downloads

 

@kodiak, Congrats. This was a shrewd call.  I'm looking at NN and Ondas now as they came on my radar because a press release mentioned one of my holdings that does something similar, Anterix.  Why don't you start a post on this?